A Simple Approach to Setting Reasonable Royalties for Standard-Essential Patents

Abstract

A Standard Setting Organization (“SSO”) typically requires its members to license any standard-essential patents on fair, reasonable, and non-discriminatory (“FRAND”) terms. Unfortunately, numerous high-stakes disputes have recently broken out over just what these “FRAND commitments” mean and how and where to enforce them. We propose a simple, practical set of rules regarding patents that SSOs can adopt to achieve the goals of FRAND commitments far more efficiently with far less litigation. Under our proposed approach, if a standard-essential patent owner and an implementer of the standard cannot agree on licensing terms, the standard-essential patent owner is obligated to enter into binding baseball-style (or “final offer”) arbitration with any willing licensee to determine the royalty rate. This obligation may be conditioned on the implementer making a reciprocal FRAND commitment for any standard-essential patents it owns that read on the same standard. If the implementer is unwilling to enter into binding arbitration, the standard-essential patent owner’s FRAND commitment not to go to court to enforce its standard-essential patents against that party is discharged. We explain how our proposed FRAND regime would work in practice. Many of the disputes currently arising around FRAND commitments become moot under our approach. © 2013 Mark A. Lemley & Carl Shapiro. † Lemley is the William H. Neukom Professor at Stanford Law School and a partner at Durie Tangri LLP. Lemley has represented Google in matters related to the subject of this Article, but Google has provided no financial support for this project and the views offered here have neither been reviewed nor approved by Google. †† Shapiro is the Transamerica Professor of Business Strategy at the Haas School of Business, University of California at Berkeley and a Senior Consultant at Charles River Associates. We speak only for ourselves. We thank Robert Barr, Jorge Contreras, Thomas Cotter, Joseph Farrell, Richard Gilbert, Rose Hagan, Robert Harris, Brian Love, Gil Ohana, Fiona Scott-Morton, Greg Sidak, Jeffrey Wilder, and participants at a workshop at the Federal Trade Commission for helpful comments on an earlier draft. 1136 BERKELEY TECHNOLOGY LAW JOURNAL [Vol. 28:1135